Does Microfinance Reduce Poverty? the Case of Brazil

International Journal of Trade, Economics and Finance, Vol. 9, No. 2, April 2018

Does Microfinance Reduce Poverty? The Case of Brazil

Mehran Ramezanali and Djamchid Assadi

 Abstract—Main objective of this study is to assess the impact II. LITERATURE REVIEW of microcredit on poverty reduction in Brazil. Individuals and While small loans among relatives have always existed, informal businesses receiving credit from funding agencies and must demonstrate improvement in their businesses. Mass Muhammad Yunus created the modern form of it unemployment, social injustice and deplorable living (microfinance) in the mid-1970s in rural Bangladesh. In conditions in some regions of Brazil in global reports show a Yunus's view, microfinance is not about wealth distribution timid growth. To perform the study used an exploratory and allocation of funds to the poor. It is rather about research with qualitative approach in the analysis of central providing an economic tool so that the poor independently bank reports from brazil and other internal reports and also work their way out of poverty [1]. The Yunus's idea of compared with annual reports issued by the united nations. providing small loans to the financially excluded individuals The profile of borrowers is very similar to the profile of [2], inspired many in 1970s and 1980s around the world for entrepreneurs specially when comparing income and poverty alleviation. The worldwide renaissance came in geographical location. However, microcredit is important for creating jobs but the government needs to implement other with the Microcredit Summit (Global Conference on anti-poverty programs and create new assistance projects to Microcredit) in Washington in 1997 where representatives achieve satisfactory results. from 137 countries considered microcredit as an important instrument for reducing poverty in the world. The Summits Index Terms—Microcredit, entrepreneurship, poverty, defined microcredit as small loans to very poor people for microfinance, financial institutions. self-employment projects that generate income, allowing them to care for themselves and their families. The term ―micro‖ gave rise to many other micro-products such as I. INTRODUCTION savings, insurance, and other financial services to the poor. Two distinct visions suggest two different solutions to the In 2006, the Norwegian Nobel Committee awarded both persisting problem of poverty in Brazil. One advocates state Yunus and Grameen the Nobel Peace Prize for upholding intervention for wealth redistribution. The other microcredit in the struggle against poverty. In addition, recommends private entrepreneurial initiatives for wealth many researchers have claimed that microcredit programs creation. Now, after more than a decade of state-based alleviate and reduce poverty: [3]-[8]. Controversies have policies supported by a buoyant commodity market that however emerged progressively. Researchers and turned out finally to be a kind of Dutch Disease and the practitioners showed divergent views on the positive impact worst economic crisis since the 1930s, Brazil seems to of microcredit on poverty eradication and job creation. consider more private and market-based initiatives for Advocates believe microfinance has decreased poverty eradicating poverty. This crisis surprisingly provided an where it has been massively adopted is initiatives. unprecedented opportunity for microfinance in a country Microcredit fights poverty, reduces inequalities, and where it has grown proportionally much less compared to improves the living conditions through solidarity, many other countries, especially in Africa and Asia. empowerment and social capital [9]. Definition of poverty As Brazil goes through a political and economic crisis as lack of capital, and microcredit as generator of capital [4]. since early 2015, the government disposes less liquidities Microcredit as an alternative to the problems arising from for social assistance, anti-poverty programs and credit the exclusionary globalization produced worldwide [4]. facilities. Under these circumstances, microcredit might Microcredit models are in line with poverty alleviation and provide solutions to the problem of funding (self- empowerment strategies [3]. A greater impact when employment) entrepreneurship and unemployment [1]. microcredit observes a local presence and addresses the What is the truth? Does microfinance, and in particular needs of female borrowers and their households [5]. The microcredit provide significant positive results to reduce joint use of microcredit and community ties can end to a poverty, or does it leave the poor borrowers in unchanged or real economic and social betterment [9]. even worse conditions? The research on hands aims to Critics claim that microfinance has only grown in volume provide elements of answer to this question of microcredit without effectively supporting the poor to earn their way out impact in the particular case of Brazil. of poverty. The difficulties of finding studies that provide empirical evidence on positive impact of microfinance on poverty reduction in Pakistan [10], also the minimal impact in Asia [11], challenges for more evidences [12]. Contribution to reducing poverty in the end; however, it is not necessarily the most important factor [13]. Even if Manuscript received January 11, 2018; revised March 7, 2018. microcredit can effectively alleviate the less severe poverty Mehran Ramezanali is UNIDAVI, Brazil (e-mail: cases, the likelihood that it reduces core poverty is [email protected]). doi: 10.18178/ijtef.2018.9.2.589 60 International Journal of Trade, Economics and Finance, Vol. 9, No. 2, April 2018 considerably smaller [6]. Poverty stands for deprivation of education, consumer protection, and financial inclusion. economic, social, physical, environmental, cultural, and This document provides an overview of microcredit in political resources that prevent individuals from fulfilling Brazil from the point of view of both borrowers and their potential [3]; and corollary, poverty alleviation means financial institutions. increase in income and thereby increase in consumption and The four necessary precondition we consider are: relation assets of individuals who have no productive resources but between supply and demand of microcredit, institutions their bodies and labor [5]. While microfinance covers a supporting microfinance, distribution of microcredit in wide range of services like credit, savings, insurance, relation to the distribution of poverty, and the affectation of remittance and non-financial services like training, microloans to entrepreneurial of consumptive. The ex-ante counselling etc. that are provided to the low-income group factor is evidently the poverty eradication. In line with the [7], our focus in this paper is microcredit. To assess the above inquiries, definitions and delimitations, we structure impact of microcredit programs on poverty relief in Brazil, the remaining of the paper as follows. we mainly exploit the official data and reports during the First, we compare the volume of microcredit and size of period 2014-2015, and match statistical data provided by the (poor) population in Brazil. Second, we review the Central Bank of Brazil (BCB) and the Internal Revenue evolution of institutions in the sector of microcredit. Third, Service. we discuss the distribution of microcredit in comparison to Doing so, we take into account the controversies on both the distribution of poverty in Brazil. Four, we explore the the indicators and the measurement tools. Researchers affectation of microloans by borrowers to productive and should not reduce assessing the impact of microcredit on consumptive purposes. Five, we finally assess of microloans individuals' welfare but rather on the community [14]. on the alleviation of poverty in Brazil. Researchers should use methods such as the Human A. Do Supply and Demand of Microfinance Correctly Development Index (HDI) to simultaneously measures long- Match in Brazil? term progress in three basic dimensions of human development: healthy life, education and living standards While microfinance has relatively lived a long history in [15]. The autor has compared examples of both negative and Brazil, its volume remains proportionally modest in positive impacts through scrutinizing the questions asked, comparison with other countries, taking into account the the methodologies used, the findings reported and the weakened economy and the credit limit. interpretations provided [16]. He concludes that the primary In 2014, the 1045 institutions that sent their data to the source of the conflict lies in intra-household power relations MIX platform reached 111.7 million low-income clients and [16]. produced a loan portfolio of $87.1 billion with a growth of +12.6%. The increase in numbers of borrowers has almost tripled compare to 2013 increasing from +4.8% to +14.2%. It is estimated that the rate of growth in the sector for 2015 III. RESEARCH METHODOLOGY will be +10% for loan portfolio and +15.8% for borrowers Our research approach is based on exploratory and [17]. At the national level, the microcredit portfolio qualitative analysis of the data published by the Federal represents 0.2% of the value and 0.4% of the operations of Bank of Brazil and the other indexes about the level of the National Financial System (SFN), respectively poverty in Brazil. We use that data provide by the Brazilian amounted to R$ 5.3 billion, for 3.1 million loans [18]. As federal banks report, ―Série Cidadania Financeira: Estudos the Fig. 1 indicates the loans of microcredit grew from 2011 em Educação, Proteção e Inclusão‖, in specialized in to 2014 and then entered lightly in a fall. Financial Citizenship and citizen financial rights: financial

TABLE I: TOP 10 COUNTRIES BY BORROWERS AND LOAN PORTFOLIO OUTREACH Rank Country Borrowers FY 2014(m) Borowers growth (%) GLP FY 2014 (USD) bn GLP Growth (%) 1 India 39,5 28,5 7,3 42,6 2 Peru 4,1 3,5 10,1 0,1 3 Vietnam 7,7 0,5 6,9 5,2 4 Bangladesh 21,8 6,7 4,6 22,8 5 Mexico 6,0 2,8 4,7 1,7 6 Colombia 2,8 5,2 6,5 8,9 7 Ecuador 1,6 13,6 4,7 16,7 8 Bolivia 1,3 0,1 5,4 16,4 9 Cambodia 2,1 13,2 3,9 43,5 10 Brazil 2,9 4,7 2,8 7,4 Source: Microfinance Barometer 2016.

The default of the total microfinance portfolio is 5.6% grantors development agencies is 5.2% for the PFs and among Individuals (PFs) customers and 5.0% of the Legal 1.4% for the PJs. The low rate of default of PJs is largely entity or small business (PJs) customers, higher percentages due to the influence of the largest segment of the grantor for than those found in the Banking Industry (4.4% and 1.8%, this type of customer, which holds 66.6% of the portfolio respectively) [19]. Income commitment of PFs microcredit granted by funding agencies to PJs and reports have zero borrowers is 30.4%. In other words, these people commit default in microcredit operations (it is mentioned the case of 30.4% of their income on credits in general in SFN (not OSCIPs customers, who probably passed on much of the necessarily only microcredit). The default of micro-credit resources for individuals whose default is scarcely credible

61 International Journal of Trade, Economics and Finance, Vol. 9, No. 2, April 2018 that is zero). The default of microcredit grantors banks is Institutional Development Program (IDP) to support the 5.8% for PFs and 9.4% in the PJs. The default in expansion of microfinance in Brazil. In 1997, another microcredit grantors credit unions is 1.3% for PFs and 1.1% Brazilian public financial institution, the Bank of the in the PJs - the smallest of the four segments - and is low for Northeast of Brazil, launched a pilot microfinance program, most of the segment's institutions. The default of micro- called CrediAmigo. This program became the largest credit grantors SCMs is 9.0% of PFs and 6.1% of the PCs. microfinance program in the country and one of the largest in Latin America, both in terms of volume of resources and in terms of number of clients [20]. In 2003, the Brazilian government launched a new 5.45 5.32 5.31 program, "pacote de microcrédito" (package of microcredit), based on three pillars of banking, stimulation of microcredit 4.17 supply, and formation of credit cooperatives [21]. The Brazilian Federal Government has buoyed public policies to 2.94 provide credit to low-income populations during the two 2.42 terms of President Fernando Henrique Cardoso (FHC) and the two terms of President Luíz Inácio Lula da Silva [20]. The Brazilian Federal Government created the National Program of Oriented Productive Microcredit (PNMPO) in 2011 2012 2013 2014 2015 2016 2005 with the objective of generating employment and Fig. 1. Amount of microcredit loans in billions Reals (R$) Source: BACEN-2015 income among micro-entrepreneurs [23]. With the support of the Ministry of Labor and Employment (MTE), the B. Do Institutions Support Microfinance in Brazil? PNMPO created organizations specialized in microcredit (Civil Society Organizations of Public Interest and Credit Many governments in developing economies have Societies to Micro-entrepreneur), and other organizations transferred payments to increase financial inclusion. In authorized to perform broader financial transactions. By Latin America and the Caribbean countries, 68 percent of May 2007, the PNMPO had accredited 231 institutions in transfer recipients receive the payments into an account. In Brazil [24]. Brazil: among the 15 percent of adults receiving In August 2011, the Brazilian Federal Government government transfers, 88 percent receive them directly into reformed the PNMPO and released the ―CRESCER‖ an account. In South Africa, a third of adults receive (GROW) providing credit at lower interest rates to low- government transfers—and 82 percent of them receive the income individuals and micro entrepreneurs within the payments into an account (The Global Findex Database National Program of ―Brazil without Pover y‖. Do these 2014). However, this kind of policy is not sufficient to and other institutions effectively support the development of reduce poverty. For eradicating poverty, states should not microfinance in Brazil? The lack of adequate legislation and only facilitate access to funds for small businesses, but also regulatory obstacles that prevented growth of the consolidate the institutional context. microcredit on a growing scale in Brazil [6]. Do institutions back microfinance initiatives to eradicate poverty in Brazil? The principal objective of institutions is TABLE II: AMOUNT OF FINANCIAL INSTITUTIONS OPERATING to ensure that the microcredit loans lead to income- MICROCREDIT AND FIS IN THE SFN, BY SEGMENT Financial generating effects within the local economy and community FIs in National Institutions (FIs) Financial % [14]. The pertinent institutions consequently support and operating System (NFS) promote the transactions and interactions between four microcredit Microcredit major actors. Financially excluded individuals (in particular Segment FIs % FIs % women) who constitute the target. Intermediaries that //NFS distribute small loans to and collect repayments from Funding agencies 9 8,8 15 1,1 60 borrowers. Providers and lenders who supply funds. There Bank 10 9,8 153 11,2 6,5 Credit cooperative 73 71,6 1.161 85,3 6,3 are also public and private institutions that define and SCM 10 9,8 32 2,4 31,3 regulate interactions between the mentioned actors. Total 102 100,0 1.361 100,0 7,5 In this section, we review the developing of public and Source: Financial Citizenship Series, 2015. private institutions that support microcredit in Brazil. Contribution in highlighting the history and observation of There are four types of microfinance institutions in Brazil the complexity of microcredit in Brazil [8], [9], [13], [20], (Table II): funding agencies, banks, credit unions (credit [21]. Brazil has experienced a long story in microcredit and cooperative) and microcredit institutions. Three state-owned the urban informal sector of microcredit since the UNO banks provide more than 80% of the portfolio value. There program in 1973 [22]. Since 1990s, both public and private are mainly 102 microfinance institutions in Brazil. Only ten institutions have initiated policies and programs to support financial institutions concentrate the distribution of microcredit. microcredit in Brazil [18]. They account for most of the In 1996, the National Bank for Economic and Social value of the portfolio (91.4%), the number of operations Development (BNDES), one of the most important (94.1%) and the amount of customers (93.5%). Of those 10, Brazilian federal government for fostering credit, created however, only four are active. Three of them are public the Popular Productive Credit Program (PCPP) and the (Bank of Brazil, Caixa Economica Federal and Banco of Nordeste) and one is private (Santander) [18].

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In Brazil, the banks providing microcredit are located in Northeast. The Northeast region accounts for 52.1% of the major cities. For this reason, few Brazilians have access to national portfolio in value. Its share of number of microcredit. transactions with customers is around 35%. The average value per transaction in this region is R TABLE III: MICROCREDIT: VALUE AND NUMBER OF OPERATIONS OF $ 3,350, almost 50% above the national average, which is R THE TOTAL PORTFOLIO BY SEGMENT $ 2,248. All other regions have average below the national Quantity of Segment Portfolio Value % % Operations average. The Southeast is the second largest microcredit Funding agencies 109.142.659 2,0 17.792 0,6 portfolio, accounting for 22.6% of the national value - well Bank 4.879.957.516 91,4 2.943.231 95,0 below the Northeast portfolio. However, the Southeast Credit 327.864.934 6,1 121.352 3,9 region has better infrastructure, number of industries and cooperative economic position, has also the largest number of operations SCM 22.826.302 0,4 15.705 0,5 Total 5.339.791.410 100,0 3.098.080 100,0 and customers in Brazil: 36.4% of national participation, 1.5% Source: Financial Citizenship Series, 2015. above the Northeast, and the lowest average value per transaction (R $ 1,397). C. Is the Distribution of Microcredit in Brazil Fair and Just? D. How do Borrowers Affect the Microloans? In this section, we evaluate whether the distribution of One cannot expect that microloans significantly eradicate microcredit in Brazil is fair and just by comparing the poverty if borrowers do not affect them to productive wealth distribution of microcredit with the distribution of poverty. generating ventures. How do borrowers affect the Distribution of microcredit varies across regions in Brazil. microcredits they receive? The following table shows that Does it correspond to the distribution of poverty in the borrowers are predominately individuals, and not legal country? There are wide disparities in the extent of poverty entities, firms, which might recourse to loans for in Brazil. More than half of all poor Brazilians live in the development purposes.

TABLE IV: MICROCREDIT BY TYPE OF CUSTOMER AND REGION, (%) Center west Northeast North Southeast South Brazil Individual 94,5 99,5 97,9 95,6 79,9 94,8 Legal entity 5,5 0,5 2,1 4,4 20,1 5,2 Source: Financial Citizenship Series, 2015.

The following figure indicates how borrowers affect revenues of up to R$ 12,000, 39.4 percent from R$ 12,000 microloans between different purposes. It shows that to R$ 36,000 and 6.3% from R$ 36,000 and R$ 60,000, individuals mainly affect the loans to housing. totaling 93.5 percent to R$ 60,000. [18]. Of the 23 million entrepreneurs at an early stage, the 49 percent are men and 51 percent are women. 53 percent are Housing between 18 to 34 years old, 40 percent between 35-54 years Consigned and 8 percent between 55-64 years. 50 percent have completed high school education or above. 62% are married Vehicles or living in common-law marriage. 51 percent are white Credit card [18]. The role of the loan officer not only as a seller or credit grantor, but also as advisor, appears to be critical for Rural,

agri-industrial microfinance to become effective [9]. Often, information and suggestions from loan officers can help enable business Consignment credit entrepreneurs. One characteristic of the Brazilian labor Overdraft market is that people tend to have more than one job to increase their income [27]. On the other hand, micro- Microcredit entrepreneurs tend to overestimate the number of hours that really work, especially in the case when they use their home 0 5 10 15 20 25 30 35 Fig 2. Different sources of0 loans 0e credit.0 Source: 0 Série Cidadania0 0 0 as the business location. In spite of this subject major part of Financeira, 2015. entrepreneurs in Brazil, seek to open new business because of necessity and fundamental need. Should microcredits alleviate poverty, borrowers might In terms of responsibilities and be with payments on time, affect them to entrepreneurial purposes than consumptive they pointed out some factors as determinants of default are ones. The following figures show the evolution of firm micro-entrepreneurs with higher education degrees, male creation in Brazil. Entrepreneur as a creative individual who entrepreneurs and singles, businesses that have higher detects business opportunities in his/her environment and monthly revenue and operating income and companies sets to achieve goals [25]. Microenterprises are mainly operating with formal records are more likely to default concentrated around traditional commerce in Brazil [26]. compared to those without formal registration [28]. A Lower initial capital requisite, minor qualification minimalistic microcredit program might not be the most requirement, simplified physical structure and ability to cost effective policy for reducing hardcore poverty [6]. develop the activity at home explain this phenomenon. 47.8 Loans to the core poor are the riskiest, the costliest and the percent of established entrepreneurs in 2014 had annual least effective in terms of core poverty reduction. Two

63 International Journal of Trade, Economics and Finance, Vol. 9, No. 2, April 2018 factors can jointly stabilize the Brazilian microcredit, Recent studies show that a large number of microcredit financial sustainability and social responsibility [11]. borrowers in Brazil are indebted and this is because they In 2014, to address the turnover of entrepreneurs, have not been successful in their business. It is a matter of research opened 5 new tracks in the range of "up to concern that in some countries, even in Brazil, there are R$ 60,000.00". It has been found with this detail that 51.1% some institutions where microcredit policies are of the initial entrepreneurs focused on billing range of up to implemented, without the proper understanding of the R$ 12,000, 23% between R$ 12,000 and R$ 36,000 and 3.6% actions necessary to achieve effective results in alleviating from R$ 36,000 and R$ 60,000 totaling 77.7% to R$ 60,000. poverty and, consequently, promoting social inclusion [32]. Bureaucratic procedures constitute one of the most Even if there is no statistical correlation between important obstacles in providing assistance to formal or microcredit users and entrepreneurs, the data suggest that informal small businesses and to reduce poverty. growth of entrepreneurs depends on the number of The strong focus on financial guidance also helps borrowers. The profile of borrowers is very similar to the microcredit to have a social transformation character, profile of entrepreneurs specially when comparing income because it helps the entrepreneur to improve the and geographical location. Offering social capital to the performance of your business and develop it permanently community provides the decision-making and the practice [29]. Borrowers perform better in terms of livestock, of actions involving collaboration and benefit to the whole participation in savings schemes and overall value of community [4]. household assets [10]. Microcredit certainly is a promising and suitable tool to fight the less poignant levels of poverty of millions of E. Impact of Microcredit on Poverty Relief Brazilians. However, the belief that microcredit is a cure all After having analyzed the preconditions of microcredit's to fight core poverty under appreciates the heterogeneity of positive impact on poverty alleviation, we here explore how the poor. Brazilian programs aiming to alleviate chronic microcredits have effectively affected poverty in the case of poverty need to take a more complex perspective of what Brazil. Between 1980 and 2013, Brazil’ HDI value contributes to chronic poverty [6]. increased from 0.545 to 0.744, an increase of 36.4 percent Although microcredit would be an effective means of or an average annual increase of about 0.95 percent. reducing poverty, but its outcome depends on the economic Georgia and Grenada share the same rank (Human condition and political situation of each country. Financial Development Report 2014). Based on Human Development education and teaching of entrepreneurship techniques Report of 2015, this index had a small growth about 0.011 should be basic requirements for granting loans to the less resulting to a new value 0.755 in 2015 and put the country educated population. in 75º place positioning it between 188 countries and The lack of updated data and reports disclosed by the territories. Brazil’ HDI value for 2013 is 0.744 that Brazilian government and also a few studies on microcredit positions the country at 79 out of 187 countries and in Brazil, to some extent made difficult to elaborate and territories. Has the positive impact of microcredit benefited analyze this study. different social categories in Brazil? While microcredit is an effective poverty alleviation tool for the less severe poverty REFERENCES cases, its impact to reduce core poverty is not evident. 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